Lex Service Plc

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Harvard Business School 9-296-003 Rev. March 13, 1998 Lex Service PLC—Cost of Capital On November 25, 1993, the directors of Lex Service PLC, received a memorandum from G. Lionel Harvey, the company’s deputy chief executive, concerning the approaching board meeting on December 2. Attached to the memo was a report by the L.E.K. Partnership, a London-based consulting firm, concerning Lex’s cost of capital. The report and its implications for management were to be discussed at this board meeting. Recent developments at Lex had focused top management’s attention on the company’s capital budgeting procedures and its cost of capital. Between 1991 and 1993, various sales of subsidiaries and other assets had provided Lex with more than £340…show more content…
2 This document is authorized for use only in 2013-Financial Management TC by Paula Ant?o at Universidade NOVA de Lisboa from March 2013 to September 2013. Lex Service PLC—Cost of Capital 296-003 interest in the business from I.M. Group, which owned the Hyundai franchise.3 The acquisition gave Lex management control of a three-year rolling contract that Hyundai Car (U.K.) held with the Hyundai Motor Company of Korea. In addition, Lex acquired from I.M. Group 49% of I.M. Finance, which offered retail finance to Hyundai customers and wholesale finance to Hyundai dealers. The total cost of these acquisitions amounted to £16 million. Two Major Lines of Business Subsequent to these 1992-1993 transactions, Lex Services’s businesses consisted of two fundamental halves: automotive distribution and contract hire (vehicle leasing and finance). As shown in Exhibit 3, automotive distribution was carried out chiefly through wholly or majority owned subsidiaries, the largest of which was the Lex Retail Group. Contract hire, on the other hand, was conducted primarily through “associated” enterprises that were jointly owned with Lombard North Central PLC, a part of the National Westminster Bank. Lex and Lombard each owned 50% of Lex Vehicle Leasing (auto leasing), Transfleet (truck leasing), and Harvey (fork-lift truck leasing). Lex managed

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